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Mexico May End Sweetener Tax;
Two U.S. Firms Sue for Damages

By

Amy Guthrie Dow Jones Newswires

Updated Nov. 26, 2003 12:01 a.m. ET

MEXICO CITY -- U.S. makers of high-fructose corn syrup might finally have a cure for their Mexican headaches.

Mexican President Vicente Fox's government has suggested revoking a two-year-old, 20% tax on beverages made with high-fructose corn syrup that was drawn up in a late-night congressional session to help Mexico's struggling sugar industry. If the revocation is approved by Mexico's Congress, the special tax would be erased for 2004.

"Today the problem of [domestic sugar] overproduction has been overcome, and the country is even importing sugar," the Fox government said in its 2004 budget proposal. "And so, it's proposed that the tax be repealed."

In October, Corn Products submitted an arbitration claim for $325 million against Mexico under the North American Free Trade Agreement to cover lost past and future profits, as well as damages for what the company calls a "discriminatory" tax.

Archer-Daniels-Midland gave notice last month that it is prepared to do the same, seeking over $100 million in damages from Mexico. If the cases drag on, the U.S. companies could seek more.

"Mexico is the world's second-largest consumer of soft drinks, and the market for HFCS in that country was growing rapidly until the Mexican Congress imposed the discriminatory tax," ADM said in its claim filing.

ADM halted production of high-fructose corn syrup for beverages at its joint-venture plant in Guadalajara, Mexico, and has stopped shipping high-fructose corn syrup from the U.S. to Mexican soft-drink bottlers.

It isn't the first time, though, that Mr. Fox has tried to get rid of the special tax. He issued a presidential decree in March 2002 that suspended the tax for seven months. Mexico's Congress challenged the decree, which was overturned by the country's Supreme Court.

Mexican legislators expect that the tax will change, although perhaps not as favorably for the high-fructose corn-syrup producers as Mr. Fox, a former
Coca-Cola Co.
executive, has proposed. Finding a compromise on the issue among Mexican legislators, many of whom are ardent supporters of the national sugar industry, won't be easy.

"We have to talk to them [the legislators]," said Juan Carlos Perez, a member of the congressional Finance Committee and a legislator from the opposition Institutional Revolutionary Party.

Mr. Perez said legislators are meeting with beverage-industry chambers to clinch a commitment to support the sugar industry if the tax on high-fructose corn-syrup is repealed. "If we can promise that national sugar production will be bought, through some sort of industry agreement, then it should be easy to convince the congressmen who are against repealing the tax," Mr. Perez said.

Federico Doring, a congressman with the ruling National Action Party and a member of the Budget Committee, isn't so certain the tax should, or will, be eliminated. "It's the perfect tax because it's a captive market. They have to keep consuming no matter the price, and we're helping the sugar industry," he said.

Another option for tweaking the tax, Mr. Doring suggested, would be to lower it so that the sweetener can compete, but not so much that it would have an edge over pricier sugar. By encouraging beverage companies to buy sugar, the government saves money it would otherwise have to spend to prop up the industry.

Prior to the tax on high-fructose corn syrup, Mexico's sugar industry was accumulating surpluses and debt, which led the government to seize 27 sugar mills in 2001. But with the demand for an additional 500,000 metric tons of sugar to replace high-fructose corn syrup, all of Mexico's sugar is now being purchased. In September, the government even had to issue an import quota for 112,000 tons of sugar to meet national demand in the last two months of 2003.

The substitution effect means that the tax on high-fructose corn syrup actually doesn't generate much revenue for the federal government. According to Finance Ministry data, Mexico has collected 1.34 billion pesos ($119.7 million) from the tax since its inception, or less than 1% of total tax revenue.

Coca-Cola, which buys close to 25% of Mexico's sugar production, has stopped using high-fructose corn syrup in Mexico. Previously, about 20% of Coke produced in Mexico was sweetened with such syrup. Seven out of 10 soft drinks purchased in Mexico are Coke brands.